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Dividends – a catalyst for performance
21 Dec 2020

As the end of the year approaches, it is the norm within the investment community to take stock of our current investment strategies and devise an outlook for the upcoming year. This provides a platform to make calculated adjustments to our tactical positioning if needed.




This time last year, none of us had forecast how 2020 would pan out although in December 2019, news started flowing that the first human cases of COVID-19 were being reported in Wuhan. The highly infectious nature of the virus quickly led to neighbouring countries reporting imported cases during the start of 2020.




Back then, however, little did we know the real impact that this virus was going to have on the real economic front. Undoubtedly, this has put unprecedented pressures on central banks and governments to intervene with decisive policy responses to help businesses survive the pandemic. That said, although most economies received help from different authorities, recessions were inevitable and COVID-19 plunged the global economy into the worst recession since World War II.




The first major sign of a recession was perhaps the stock market crash in February 2020, which was the fastest global stock markets drop in global stock markets in history. Malta’s stock market was no different and certain sectors like the hospitality, leisure and retail were among the worst hit. This was the result of an indiscriminate effect that this virus was having across sectors.




Similar to their European peers, the local financial sector has been negatively impacted by the COVID-19 spread, which according to the latest company announcements made by the listed companies in this sector, profitability has significantly declined when compared to the same period last year. On the other hand, most of these announcements have shown some sort of optimism for the third quarter when compared to the two previous quarters of 2020.




However, the challenges for this sector are expected to remain until consumer confidence recovers. But news that the vaccine will be shortly rolled out augurs well for many of our listed companies and some investors have already started rebuilding positions in the market. One has also to keep in mind that the financial sector is also facing the effects of an extremely low interest rate environment.




Although most economies received help, recessions were inevitable



Undoubtedly, the hospitality and leisure industry suffered a major blow, which sector is directly related to tourism. The uncertainty brought about by the pandemic and the loss of direct air connectivity played an important role for the huge adverse impact that this sector has faced. With one of Malta’s largest contributors, tourism, under threat, a shock to the sector was inevitable.




However, as COVID-19-related issues start to fade out, a crucial point for Malta will be the restoration of a significant number of direct air connections lost during the pandemic, which plays a key role in facilitating economic developments through various channels, such as tourism.




Recently, we carried out an analysis on five companies which are listed on the Malta Stock Exchange (MSE) that had initially announced and eventually cancelled their dividend distribution during the year due to factors related to the pandemic. The main reason for the cancellation of dividends in the banking sector was a recommendation by the European Central Bank in March 2019, and during July 2019 this was then extended further until January 2021.




The main aim of this recommendation, which is exceptional by nature, is to preserve banks’ capacity to absorb losses and support the economy in an environment of exceptional uncertainty. Likewise, EIOPA, the European Body for Insurance and Occupational Pensions has also issued a recommendation to its industry not to pay dividends. Another company which is directly related to tourism has cancelled its dividend payment in order to manage its cash reserves in a moment of severe curtailment in revenue streams.




The companies that were analysed amount to almost half of the market cap of the MSE, which have a significant bearing on the performance of the local market. To gauge the importance of the dividend in the local market, an equally weighted portfolio was created, which was then split in three different timelines.




The first period from January to April was analysed to capture the real effect of COVID-19, the second part from May to October was evaluated to test the impact of the announcements, what we dubbed the ‘no-dividend’ effect, and from November to the time of writing to capture the turn-around of this pandemic, where pharmaceutical companies were announcing the efficacy rates of their vaccines.




It was concluded that during the ‘no-dividend effect’ period, prices have reacted more negatively when compared to the start of the COVID-19 period. This implicates the importance of dividends in the local stock market which represents an income-driven local investment community. During November, the performance of equities under scrutiny have improved drastically, which is of benefit for those shareholders who will seek to take investment opportunities with a medium- to long-term horizon.




As more top European Central Bank officials continued to voice their support for the ban on the financial sector to be uplifted, on December 15 the ECB announced that limited bank dividends may resume. This will continue to support investor confidence which intrinsically can be transposed to capital gains on their shareholdings.




On the other hand, despite optimism that the end of the pandemic is in sight, regulators are wary that if they allow no restriction on pay-outs, the sector might lack the financial reserves to bear any possible losses. The uplifting of the ban, albeit limited, will be of a great benefit for those investors who have managed to catch the bus earlier.




The writer and the company have obtained the information contained in this document from sources they believe to be reliable but they have not independently verified the information contained herein and therefore its accuracy cannot be guaranteed. The writer and the Company make no guarantees, representations or warranties and accept no responsibility or liability as to the accuracy or completeness of the information contained in this document.




Clayton Scicluna, portfolio manager, BOV Asset Management



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